Hope is on the horizon for operators of Canadian sour-gas plants. Persistent low natural gas prices have significantly reduced sour-gas well drilling and throughput to plants. If this trend continues, sour-gas production will fall below plant minimum turndown rates, jeopardizing the viability of plant operations.

Potential solutions, such as having competing operators agree to cooperate and consolidate or re-tool their assets, are being assessed, according to a new study by Ziff Energy Group and Gas Processing Management Inc.

Sour gas contains significant amounts of hydrogen sulfide (H2S), a colorless, highly flammable, toxic chemical compound that is dangerous to the environment and explosive when mixed with air. Typically, sour gas contains more than 5.7 milligrams of H2S per cubic meter, equating to some 4 parts per million by volume, and can contain up to 90% of H2S by volume.

While many North American areas contain sour gas, it is of particular importance in Alberta, Canada’s Athabasca oil-sands development, which now contains outdoor stockpiles of elemental sulphur from sour-gas processing.

Slightly more than 33% of Alberta’s produced gas is processed at large sulphur recovery plants, accounting for nearly 85% of all Canadian sour gas. British Columbia contributes most of the remainder. The gas is produced from more than 6,000 sour-gas wells, processed through some 250 facilities in Alberta (including more than 50 large, elemental sulphur production facilities) and transported through nearly18,000 kilometers of sour-gas pipelines in Alberta.

According to Alberta’s Department of Public Affairs, nearly 99% of the sulphur in Western Canada’s sour gas is recovered and converted into elemental sulphur for manufacturing fertilizers, paper, pharmaceuticals, steel and other products. In fact, Canada is one of the world’s leading producers of sulphur. As such, the country has emerged as a global leader in the safe handling and storage of sulphur.

However, Canadian sour-gas production is declining. By 2009, it had fallen to 62% of 2002 production. As well flows decline, and operating costs stay the same or increase, production costs can exceed the revenue from sales.

Sour-gas study

Recently, two Calgary-based consulting firms, Ziff Energy Group and Gas Processing Management Inc., began jointly producing a series of sour-gas plant multiclient studies to evaluate repositioning strategies for the sour-gas-processing infrastructure in the Western Canadian Sedimentary Basin.

The studies analyze how to consolidate and re-tool facilities positioned near declining conventional sour-gas production to optimize operating performance and costs for the existing reserves and new resource developments—and potentially save up to $200 million per year.

“The reason we are undertaking the study now is because throughputs of the larger sour-gas processing facilities in the province of Alberta are low,” says Bob Child, principal for Gas Processing Management Inc. “Average gas throughputs are low, while throughputs on the sulphur side are less than 30%, and have been dropping for the past number of years. With current low gas prices, the activity on deep-sour developments has basically dropped to nothing.”

The reason we are undertaking the study now is because throughputs of the larger sour-gas processing facilities in the province of Alberta are low.

Given such a drop-off in production and processing, the Canadian industry must gain efficiencies and reduce expenses, but it won’t be easy or quick. According to the firms’ study, the declines will likely continue, causing “real challenges in keeping the plants operating,” Child says.

Drawing from his discussions with plant operators, owners and producers, he concludes that facility managers have recognized the troubling trend and are looking for new approaches to generate solutions. A third-party analysis is one such approach.

The studies will break the basin down into logical areas for analysis, look at each region and the types of available facilities, and consider a province-wide, gas-processing-facilities optimization and utilization plan to meet the challenge of declining sour-gas production.

“There will probably be more than one outcome, but the overall outcome will be a lowering of the cost structure by eliminating some of the fixed costs in these plants that are expensive to operate,” says Bill Armstrong, also a principal with Gas Processing Management. “By combining the facilities and taking advantage of certain parts of each of them, the costs can be reduced for the total infrastructure, and therefore reduce the costs for producers as they bring gas to these facilities.”

Bill Gwozd, vice president of gas services for Ziff Energy Group, observes that, 15 years ago, two large producers in central Alberta became “married to each other” through a joint-venture company called Central Alberta Midstream.

“That was a unique solution that has already happened. Some of the potential solutions in the future may be the marriage between of some of the low-load-factor facilities, to combine into a facility with a high-load factor. That is, if there are two plants that have a load factor of 50%, they may be married to have a plant with a load factor of 100%,” he explains.

"Some of the potential solutions in the future may be the marriage between some of the low-load factor facilities, to combine into a facility with a high-load factor," Bill Gwozd, vice president of gas services, Ziff Energy Group.

The three consultants don’t want to prejudice the study’s outcome or the final solutions, but they are convinced that a significant change is required. The current outlook is not acceptable for the operators, or for the province as a whole, they say.

Forty-year trend

In the past, gas production in the Western Canadian Sedimentary Basin came from shallower sweet wells and deeper wells producing gas containing H2S. The wells presented with high initial-production rates and significant liquids. During the past 40 years, however, production in the basin has trended toward gas with increasing concentrations of sulphur produced from ever-deeper wells.

“With the deeper sour-gas wells, a large network of processing plants focused on gathering and processing the sour regional-well production has developed,” says Child. “It tends to be more complicated, requires more equipment, has higher maintenance requirements and costs more.”

Yet, with the maturing of the basin, the drilling activity level of those deeper gas wells has dropped off, he explains.

“If we couple the higher costs of the wells with the fact that gas prices are low, we see why that type of exploration and development has basically stopped,” says Child. “There aren’t a lot of wells being drilled because it is too financially risky. Many of the wells are not economical. So, sour gas is kind of the bellwether for the industry. It shows the biggest decline and the lowest utilization.”

“The size of the prize for finding the solution is a big driver,” says Armstrong. “When shareholders are involved, there has to be a way to see future returns.”

U.S. scenario

A similar scenario will evolve in the U.S., the consultants predict. Here, only about 13% of all gas wells are sour, producing primarily from four oil and gas formations in Texas and in nine other states. Consolidation will likely be limited to those specific areas.

Meanwhile, declining well-production rates are driving an increase in rig counts (rig counts increased some 122% between 2003 and 2008), driving cost upticks in new shale-gas discoveries in the lower 48 states. And, much of that gas requires treating or liquids processing before being piped to markets. As the shale plays ramp up, more processing plants are needed. Eventually, as production declines, some of them will be mothballed.

Also, in the short term, sluggish demand is keeping gas prices low. The U.S. Energy Information Agency predicts only a 0.5% annual increase in gas consumption during the next 21 years. In fact, the U.S. and Canada show a combined average of 4.5 trillion cubic feet of natural gas in storage, the highest in history.

Given such realities, U.S. owners and operators of sour-gas wells and their processing providers will someday also have to make significant changes to remain profitable, say the consultants.